Department of Treasury (Treasury) and the Internal Revenue Service (IRS) recently released TD 9890 which contains final regulations (Final Regulations) under chapter 4 (FATCA) and chapter 3 of the Internal Revenue Code (IRC).These regulations cover a number of open items and select provisions from the proposed regulations released December 2018.
Although the regulations cover a broad list of documentation issues under Chapter 4 (FATCA) and Chapter 3, there are specific items that affect our client and eliminate ambiguity of the validations using Third Party Repositories, Electronic Collection and Validation applications. Sections 2 – 4 cover several issues that will require changes in validation applications. Below I have summarized the section TAINA has prioritized.
2. Nonqualified Intermediary Withholding Statements:
Issue 1: A withholding statement must allocate the payment to each payee and provide each payee’s name, address, TIN (if any), type of documentation provided, and type of recipient.
Guidance: Since the payees information may also be included on a payee’s documentation that is associated with the withholding statement. The chapter 3 regulations provide that a nonqualified intermediary may provide a withholding statement that does not include all of the information described above, if this information can be found on withholding certificates associated with the nonqualified intermediary withholding statement and certain other requirements are met.
Issue 2: One of those other requirements identified in the previous item is that the nonqualified intermediary represent to the withholding agent that the information on the withholding certificates associated with the withholding statement is not inconsistent with any other account information the nonqualified intermediary has for purposes of determining the withholding rate applicable to each payee.
Guidance: These final regulations clarify that the general standards of knowledge that are applicable to withholding agents apply to a nonqualified intermediary for reliance on payee documentation for purposes of making the representation described in the preceding sentence.
Issue 3: A nonqualified intermediary must provide on its withholding statement the recipient category code for each payee as part of the withholding statement.
Guidance: Final regulations provide that a nonqualified intermediary may provide a withholding statement that does not include a chapter 4 recipient code for one or more payees if the withholding agent is able to determine the appropriate recipient code based on other information included on, or associated with, the withholding statement or that is otherwise contained in the withholding agent’s records with respect to the payee.
TAINA Commentary: System updates are required allowing for multiple withholding statement formats while still utilizing a standardized data dictionary so that the metadata from the various withholding statements to be mapped. This provides flexibility for clients that want to use the Alternative Method for supplying withholding statements or providing the detailed statements with payee information. TAINA has a proposed standard for the data dictionary with the metadata standards.
3. Electronic Signatures for Purposes of Chapters 3 and 4
Issue 1: A comment requested that the example be removed because it could be interpreted as providing a minimum standard for accepting an electronically signed withholding certificate and may become inconsistent with future changes in technology for providing electronic signatures.
Issue 2: Requests that a withholding agent be permitted to rely on a withholding certificate collected through an electronic system maintained by a nonqualified intermediary or flow-through entity if the nonqualified intermediary or flow-through entity provides a written statement confirming that the electronic system meets the requirements of §1.1441-1(e)(4)(iv), as described in Notice 2016-08.
Guidance: The Treasury Department and the IRS are of the view that a clear illustration of when a withholding agent can readily determine that a withholding certificate is electronically signed under current technology that is frequently used in the industry is warranted as it demonstrates the difference between an acceptable electronic signature in contrast to merely having a printed name or unrecognizable notation in place of a name. Further, §1.1441-1T(e)(4)(i)(B) clearly states that this illustration is simply an example of one set of facts that satisfies the rule.
These final regulations permit a withholding agent to consider, in addition to the withholding certificate itself, other documentation or information the withholding agent has that supports that a withholding certificate was electronically signed, provided that the withholding agent does not have actual knowledge that the documentation or information is incorrect.
Issue 3: Comments also requested that the final regulations allow reliance on an electronically signed Form W-9 (Request for Taxpayer Identification Number and Certification)
Guidance: These final regulations do not add a specific allowance for Form W-9 in §1.1441-1(e)(4)(i)(B) because rules regarding reliance on an electronically signed Form W-9 are provided in separate guidance, such as the Requestor Instructions to Form W-9.
TAINA Commentary: Although Treasury and the IRS have not prescribed representation of the electronic signature on a withholding certificate they have identified the elements that would represent a properly executed electronic signature. Vendors and payees should rely on guidance provided under Notice 2016-08 and Announcement 2001–91 to define approved system. Benefits of the current guidance is that it provides clear specifications that can be implemented regardless of core validation process.
4. Withholding Certificates and Withholding Statements Furnished through a Third Party Repository for Purposes of Chapters 3 and 4
Issue 1: A comment requested clarification on whether a specific request and specific authorization is required each time a withholding agent makes a payment.
Guidance: The standards for requiring a separate request and separate authorization to obtain a withholding certificate from a third party repository were not intended to deviate from the standards for when a withholding agent may continue to rely on a withholding certificate furnished directly by the person providing the withholding certificate.
Final regulations clarify that a separate request and separate authorization to obtain a withholding certificate from a third party repository is not required for each payment made by a withholding agent when the withholding agent is otherwise permitted to rely on the withholding certificate on an obligation-by-obligation basis or as otherwise permitted under §1.1441-1(e)(4)(ix)
Issue 2: Other comments requested that §1.1441-1T(e)(4)(iv)(E) specifically provide that a withholding agent may rely on a Form W-9 obtained from a third party repository.
Guidance: These final regulations are not amended to add an allowance for a withholding agent’s reliance on a Form W-9 obtained from a third party repository, and taxpayers should continue to refer to the other guidance applicable to reliance on a Form W-9.
TAINA Commentary: Final regulations eliminate the need to collect a withholding statement on a payment b payment basis. Regulations provide for the reliance of a withholding statement until such time that the payee provides an updated statement or the withholding agent has reason to know that the statement is incorrect or unreliable. This minimizes the transmission and need for continuous processing of the same information.
For electronic submission of Form W-9 systems need to comply with the Instructions for Requestor of Form W-9 and Announcement 2001–91 since further guidance will not be provided under Chapter 3 or 4.
Copy of published final regulations accessible from the hyperlink below: